MCKESSON CORP. (New York symbol MCK; www.mckesson.com) is the largest wholesale drug distributor in the U.S. and Canada. It also owns 49% of Mexico’s largest drug distributor.

McKesson’s clients include 40,000 pharmacies, as well as doctor’s offices, hospitals and clinics. It also sells surgical tools and health and beauty products.

The company continues to expand its technology solutions division, which makes computers and software that help clinics and pharmacies manage their drug inventories. This division accounts for just 3% of McKesson’s revenue but supplies 15% of its earnings.

McKesson’s revenue rose 20.7%, from $101.7 billion in 2008 to $122.7 billion in 2012 (fiscal years end March 31). Earnings jumped 43.3%, from $1.0 billion to $1.5 billion. Earnings per share shot up 70.0%, from $3.43 to $5.83, on fewer shares outstanding.

A big part of this growth came from acquisitions, mostly smaller firms that have enhanced McKesson’s existing operations. In the past three years, the company has spent $3.4 billion buying related firms.

This does not include McKesson’s $2.1-billion purchase of PSS World Medical in February 2013. PSS distributes medical supplies to clinics and nursing homes. By combining PSS with its surgical-products-distribution business, McKesson should be able to cut its annual costs by over $100 million by the end of the fourth year.

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Stock investing: McKesson has total of $1.1 billion devoted to share buybacks

McKesson held cash of $2.7 billion, or $11.70 a share, on December 31, 2012, so it could easily afford to buy PSS. However, the company probably took advantage of low interest rates and borrowed the cash for the purchase. That would have pushed up McKesson’s total debt to around $6.1 billion, which is still a moderate 24% of its market cap.

McKesson spends less than 1% of its revenue on research. As well, the $0.80-a-share dividend, which yields 0.7%, accounts for just 7% of the company’s cash flow. That gives McKesson lots of room to keep buying back shares.

In the first nine months of fiscal 2013, it spent $413 million on repurchases. It recently added $500 million to its authorization, bringing the total to $1.1 billion. There is no time limit on these purchases.

In the latest edition of Wall Street Stock Forecaster, we look at the ways in which the new health care legislation of the Obama administration will affect McKesson’s prospects. As well, the stock has nearly doubled in the past five years and we look at whether the shares still offer good value for investors. We conclude with our clear buy-hold-sell advice on the stock.

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